Australian banking regulator raises bank capital buffers by less than expected

SYDNEY (Reuters) - Australia’s main financial regulator on Tuesday said it had decided to lift the capital buffer for banks by less than originally proposed, a win for institutions that had argued the targets were too onerous.

The Australian Prudential Regulation Authority (APRA) said banks would now be required to lift their total capital by 3 percentage points of risk weighted assets by Jan. 1, 2024, instead of the 4-5 percentage points initially proposed.

The lower requirement means banks would now need to raise only about A$50 billion ($34.81 billion) in new junior tier-two debt in the next four years, instead of the about A$75 billion first proposed, according to analysts.

Banks had raised concerns about the limited “Tier 2” format APRA had planned to allow, fearing that the wave of supply - far above the $35 billion, according to Refinitiv, in Tier 2 debt sold globally - would push their borrowing costs higher and hurt profits.

APRA said in the next four years it would consider other methods to reach the original target, which was part of a global effort to beef up banks’ ability to absorb losses during times of financial stress.

“Having taken into account feedback on market capacity, increasing Total Capital requirements by three percentage points by 2024 ... will be easier for the market to absorb and reduce the risk of unintended market consequences,” APRA Deputy Chair John Lonsdale said in a media release.

The regulator last week eased its tough stance on mortgage lending needs for the Big Four banks in order to help revive the sluggish economy, just a few months after a public inquiry said banks needed to tighten lending standards.

APRA said the new capital requirements would strengthen the loss-absorbing capacity of major banks, while resulting in a minor rise in funding costs of less than 5 basis points.

Westpac Banking Corp WBC.AX said it was too early to estimate the cost of the capital increase, given "the pricing of any new Tier 2 Capital is expected to be impacted by the increase in supply of Tier 2 on issue by the Australian banks".

The bank added it expected to raise the bulk of the about A$13 billion in extra capital required through Tier 2 bonds.

Commonwealth Bank of Australia CBA.AX, the country's largest lender, also said the ultimate cost of the changes was unknown and estimated about A$13 billion extra capital was needed to meet requirements.

Australia and New Zealand Banking Group ANZ.AX said the new requirement will represent an increase of about A$12 billion in total capital and that this would lower its other senior forms of funding. National Australia Bank (NAB) NAB.AX put the number at A$12.1 billion.

Tier 2 bonds are a form of subordinated debt, ranking ahead of equity but below senior bonds, and Tier 2 bondholders can be forced to take losses or see their bonds converted into equity in the event of a crisis.

Moody’s said the extra capital would be positive for senior bondholders, as “it will increase the amount of capital available to absorb unexpected losses by around A$50 billion”.

The changes are aimed at increasing the financial resources available for APRA to safely wind-up a bank, and minimize the need for taxpayer support, in the unlikely event of failure.

Reporting by Wayne Cole and Paulina Duran in Sydney; Additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Shri Navaratnam and Himani Sarkar